Oligopoly
•Oligopoly A market
structure in which a small
number of interdependent
firms compete.
•The approach we use to
analyze competition among
oligopolists is called game
theory.
1 LEARNING OBJECTIVE
Oligopoly and Barriers to
Entry
• Barriers to Entry
Barrier to entry Anything that keeps
13 - 1 new firms from entering an industry in
Examples of Oligopolies in which firms are earning economic profits.
Retail Trade and Manufacturing
RETAIL TRADE MANUFACTURING
INDUSTRY FOUR-FIRM INDUSTRY FOUR-FIRM
CONCENTRATIO CONCENTRATIO
N RATIO N RATIO
Warehouse Clubs and 90% Cigarettes 99%
Superstores
Discount Department 88% Beer 90%
Stores
Hobby, Toy, and Game 70% Aircraft 85%
Stores
Radio, Television, and 62% Breakfast Cereal 83%
Other Electronic Stores
Athletic Footwear Stores 62% Automobiles 80%
College Bookstores 58% Dog and Cat Food 58%
Oligopoly and Barriers to
Entry
• Barriers to Entry
13 - 1 Economies of scale Economies of
Economies of Scale Help scale exist when a firm’s long-run
Determine the Extent of average costs fall as it increases
Competition in an Industry output.
Oligopoly and Barriers to
Entry
• Barriers to Entry
In addition to economies of scale,
other barriers to entry include:
• Ownership of a key input
• Government–Imposed Barriers
• Patent The exclusive right to a product
for a period of 20 years from the date the
product was invented.
2 LEARNING OBJECTIVE
Using Game Theory to
Analyze Oligopoly
Game theory The study of how people make decisions in
situations where attaining their goals depends on their
interactions with others; in economics, the study of the
decisions of firms in industries where the profits of
each firm depend on its interactions with other firms.
Key characteristics of all games:
1. Rules that determine what actions are allowable.
2. Strategies that players employ to attain their
objectives in the game.
3. Payoffs that are the results of the interaction among
the players’ strategies.
Business strategy Actions taken by a business firm to
achieve a goal, such as maximizing profits.